On April, 28 the Board of Directors of the Central Bank decided to lower the key rate from 9.75% to 9.25% per annum. The primary reason for the reduction is the low inflation. The key rate is important for the calculation of late payment interest, statutory interest in bankruptcy, and for determining the maximum limit for the reduction of contractual penalties. 

The Board of Directors of the Russian Central Bank based its decision on the fact that the inflation rates are dropping faster than planned. The yearly inflation is 4.1-4.3% at the end of April. This figure was the primary reason for the softening of the Central Bank’s monetary policy.

The All-Russian public organization of small and medium business “Support of Russia” has published the results of its study concerning the recently implemented risk-oriented approach during state inspections. According to these results, over the previous year the authorities have reduced the frequency of inspections, but the average fine imposed as a result of inspection has significantly increased.

As a result of 2016, the average fine imposed during inspections has increased more than twofold, according to a number of supervising authorities. In particular, in 2016, the average fine imposed by Rostekhnadzor has increased by 105.5% (up to 89.400,-- RUR or approx. 1.400,-- EUR) as compared to 2015. Fines imposed by other authorities have also shown a significant increase. For instance, the sanctions of Rostrud have increased by 13% (the average fine for labor law violations is 66.800,-- RUR or approx. 1.000,-- EUR). One of the reasons why the fines are on the rise is the increasing depth of inspections, which allows the supervising authorities to charge fines for a higher number of violations to demonstrate their efficiency.

The study also notes that since the risk-oriented approach restricts powers of the authorities and limits the frequency of inspections only in relation to scheduled inspections, the number of unscheduled inspections still remains high. Rostekhnadzor, Rostrud, the Ministry of Emergency Situations and Rospotrebnadzor are among the leaders in resorting to the unscheduled inspections of businesses.

Tax authorities can impose tax liability on a company as a result of dealing with companies that do not pay taxes or use fake documents. However, the Federal Tax Service has published an instruction to the tax inspectorates, seeking to clearly define what companies should do to avoid liability. According to the instructions, tax inspectorates can only impose such liability if the contractor is affiliated with the company, or if the company failed to perform standard due diligence checks prior to transacting with the contractor. As a general rule, however, companies that performed their own obligations under a transaction do not bear tax liability for their contractors. Using the arguments stated in the letter, taxpayers can raise additional objections during tax inspections and develop a stronger line of defense against arbitrary sanctions.

Transactions with dubious companies, which do not pay taxes or otherwise evade the law, has long been associated with tax risks, since tax inspectorates at times interpret such transactions as unjustifiable tax benefit, impose tax liability, accrue additional taxes or reject tax deductions. However, the Federal Tax Service has explained that taxpayers are not liable for the acts of its counterparts in all cases (see Letter of the Federal Tax Service dated 23.03.2017 No. ЕД-5-9/547@). The primary criterion for liability is the affiliation of problematic contractors and the taxpayer. In the absence of affiliation, liability cannot be imposed unless the tax authorities can prove illicit conduct of the taxpayer itself during the selection of the problematic contractor and the non-performance of the contractor’s obligations under the transaction.

For this purpose, tax authorities may request and analyze documents associated with the selection of a contractors. In particular, tax authorities may analyze such issues as the contractor’s reputation and experience, reasons for its selection, economic substantiation of the transaction. If the taxpayer has all reasonable documents to prove that it had acted reasonably and ensured reliability of its contractor, no tax liability can be imposed.

The Chairman of the Russian Constitutional Court, Mr. Zorkin, has publicly proposed to allow criminal prosecution of legal entities. Currently, criminal law only applies to individuals. In Mr. Zorkin’s view, the expansion of criminal punishment to legal entities will facilitate the investigation of economic crimes, since the methods and tools available to the criminal investigative authorities enable a much more detailed inspection of a company’s activities, and in particular permit covert collection of information.

This proposal was voiced by Mr. Zorkin during the joint session of the Investigative Committees of Russia, Belarus and Armenia. Currently, legal entities in Russia can only be subject to administrative liability. However, the measures that the state authorities may use during administrative investigations are quite limited.

At the same time, implementation of criminal liability could allow for more detailed investigations, including by using special investigative techniques allowing for covert collection of information (surveillance and recording of conversations, control of mail correspondence, etc.). Considering that in many Western countries criminal liability of companies is permissible, implementation of the same approach in Russia could facilitate the investigation of corruption and other economic crimes. However, criminal liability of legal entities has long been rejected by many legal scholars as unnecessary and inapplicable to Russian law, and its introduction could also lead to further unjustified interference into business activities.

In the Digest of Case Law published for the second quarter of 2017, the Supreme Court has made several important conclusions on contentious matters arising out of construction contracts. In particular, the Supreme Court noted that if the contractor refuses to rectify defects in the performed works, the customer is entitled to claim for reimbursement of the expenses incurred for their elimination, even if the respective customer’s right to remedy the defects is not stipulated in the construction contract. Apart from this, the Supreme Court has confirmed that the contractual time limits for payment to the subcontractor can be aligned with the payment by the end customer to the general contractor.

The clarifications in the Supreme Court’s Digest of Case Law are aimed primarily at the protection of customers’ interests in a situation when the contractor unlawfully evades from remedying defects in the performed works. Art. 723 of the Russian Civil Code, which is intended for the contractor’s protection from unauthorized modification of the work result, cannot be abused by bad faith contractors in order to evade from performing their obligations at the customer’s instruction. If the contractor refuses to comply, the customer will be entitled to rectify the remedies at its own and recover the associated expenses from the contractor.

Apart from this, the Supreme Court’s clarifications allow the parties more flexibility in contracts. The Supreme Court explained that payments to subcontractors can be made, after the general contractor receives payment from the customer, if the parties so agree. This position overrides the previous formalistic approach of the courts, which rigidly delineated the subcontractor agreements and the general contractor agreements and prohibited any interrelation in this respect. Nonetheless, when the subcontractor and the general contractor make their relationship dependent on the end customer, it is necessary to pay close attention to the consequences of non-payment from the customer. In this regard, it may be reasonable to provide in the subcontractor agreement that the general contractor must still pay the subcontractor within certain additional time, to ensure that the subcontractors’ works are not left without consideration (see the Supreme Court’s Digest of Case law for the second quarter of 2017).